Hungover fridays such as this, that make me miss OT. But on another note, why is it more difficult to price an interest rate derivative versus a commodity based derivative?

Commodity derivatives are generally more difficult to price than interest rates because no one knows how to model commodity price movements. See e.g. for details.

Really? I would think that interest rate derivatives would be more difficult as you have to make assumptions of the term structure of interest rates. Thanks for the book reco.

I would say that nobody really knows how to model interest rates either, but at least we have arbitrage free models and the markets themselves are more complete so the models matter more. With commodities: 1) Prices depend on future unknown supplies which depend on things like weather. Nobody has any clue how to predict weather. 2) Markets are not close to complete. You just can’t short 3 year old hogs when they are 2 (we’re talking little squeaky things not futures). 3) There are relationships among different tenors of interest rates that do not exist with commodities, e.g., June, September, December corn are very different and arbitrage is only possible at the limits. 4) You can establish real world hedges on interest rate derivatives that you can’t with commodities (this might be just a restatement of 2). And for some commodities (gold is the poster child), I would say that I can price a derivative almost as well as I can on interest rates.

Joe, I clearly should have asked you this Tuesday morning instead of Friday.

Turk…is that Q from BMO S&T???

Turkish, why don’t you post on FNG?

Did you interview at BMO, 3?

I have interviewed everywhere but BMO…I know someone who just got hired and that Q looks familiar…

Yeah, BMO’s done hiring for the program. What shop are leaning towards?